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U.S. Economy: Trade Gap Jumped by Record $7.9 Billion

U.S. trade deficit unexpectedly widens
Caterpillar, the world’s largest maker of earthmoving equipment, is among companies that have benefited from growth in emerging economies. Photographer: Jim R. Bounds/Bloomberg

The U.S. trade deficit unexpectedly widened in June by a record $7.9 billion as imports rose and shipments abroad declined.

The $49.9 billion gap was the biggest since October 2008 and followed a $42 billion shortfall in May, Commerce Department figures showed today in Washington. Exports dropped by the most in more than a year.

Stocks plunged after the report, extending a global slide, on growing concern the recovery worldwide was slowing as a report showed output in China cooled and the leader of the Bank of England said U.K. growth will be weaker than previously forecast. Today’s trade data also signaled the U.S. economy slackened more than currently estimated last quarter.

“We’re going to get less of a boost from exports in the second half,” said Aaron Smith, a senior economist at Moody’s in West Chester, Pennsylvania. “It’s consistent with slower global growth.”

U.S. stocks dropped the most in three weeks as equities retreated from Tokyo to Moscow to London amid speculation the Fed’s stimulus plan indicates the economic recovery is in jeopardy. The Standard & Poor’s 500 Index fell 2.8 percent to 1,089.47 at the 4 p.m. close in New York. The yield on the two-year Treasury note declined to a record low. The yen rose to the highest level since 1995 against the dollar.

Budget Gap

Another report showed the U.S. government posted a smaller budget deficit in July compared with the same month last year, helped by a gain in tax revenue. The excess of spending over revenue totaled $165 billion last month following a shortfall of $180.7 billion in July 2009, according to a Treasury Department report issued today in Washington.

The median forecast of 73 economists in a Bloomberg News survey called for a June trade deficit of $42.1 billion from a previously reported $42.3 billion gap in May. Estimates ranged from deficits of $38 billion to $50 billion. The gap increased 19 percent from May.

The June trade balance adjusted for inflation, which is the figure used to calculate gross domestic product, increased to $54.1 billion, the highest since February 2008, from $46 billion in May. The gap was larger than the average $42.3 billion a month in the first quarter.

The figures prompted some economists to reduce estimates for second-quarter growth to around 1 percent to 1.5 percent. Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, wrote in an e-mail to clients that he estimates growth from April through June at a 1.1 percent annual rate.

Less Growth

The Commerce Department reported on July 30 in its initial estimate that the economy expanded at a 2.4 percent annual pace in the second quarter.

Fed policy makers yesterday announced more steps to bolster an economy that wasn’t growing as much as projected. The Fed’s Open Market Committee said in a statement that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

The Fed said it will reinvest holdings of agency debt and mortgage-backed securities, the first attempt by the central bank since March 2009 to keep the economy from relapsing into recession.

Exports decreased to $150.5 billion in June from $152.4 billion, reflecting fewer shipments of semiconductors, computers and steelmaking materials. Imports rose in June to $200.3 billion from $194.4 billion, led by telecommunications equipment, automobiles and record consumer goods.

Weaker Dollar

The outlook for exports is tempered by signs growth around the world will cool. China and India, the world’s two fastest-growing major economies, are taking steps to prevent their expansions from overheating. Growth in Canada, the U.S.’s largest trading partner, is slowing.

A drop in the value of the dollar, by making U.S. goods cheaper to foreign buyers, may help brake a slide. The dollar has declined 5 percent against a trade-weighted basket of currencies since a high this year on May 20. It’s down almost 1 percent in 2010.

The U.S. shortfall with China widened to $26.2 billion in June, the highest since October 2008, as imports from the Asian nation jumped, the Commerce Department said.

In a sign it was having some success in slowing domestic spending, China’s July trade surplus surged 44 percent to $28 billion, an 18-month high, as exports rose to a record and import gains slowed, the country’s customs bureau reported this week in Beijing.

Currency Policy

U.S. Treasury Secretary Timothy F. Geithner said Aug. 4 he will “watch closely” how much the Chinese yuan is allowed to appreciate, after saying the previous month the currency was undervalued.

President Barack Obama has made export growth a key economic policy initiative. Obama is seeking to double U.S. exports during the next five years to about $3.1 trillion by 2015.

Caterpillar Inc., the world’s largest maker of earthmoving equipment, is among companies that have benefited from growth in emerging economies. Its sales to Latin America rose 116 percent to $621 million in the second quarter from a year earlier, the company announced on July 22.

“We’re seeing certainly a mixed story around the world, but for the most part positive,” Douglas Oberhelman, chief executive officer of Caterpillar said in a July 22 interview on Bloomberg Television. “We’re seeing virtually every strong-growth developing country, whether it’s Brazil, China or even India, growing pretty nicely.”

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